Yesterday, our series on debt added up how much Kiwis owe — $603b, or $120,000 a head. Today, Tamsyn Parker looks at the possible cost of delayed mortgage payments.
It used to be that Kiwis would put a holiday on the house - using cheap mortgage debt to pay for everything from a trip to Fiji to a new car.
But the word "holiday" has taken on a new meaning this year, as the global coronavirus pandemic has forced thousands of homeowners to put their mortgage payments on hold as they face job and income insecurity.
Reserve Bank figures show that as of the end of July, housing debt was up 6.4 per cent over the year to $285.59 billion, while consumer debt fell 10.2 per cent to $14.85b.
But 16 per cent of total consumer and housing debt - around $48b - was either being deferred or on reduced payments as of July 31, according to figures from the New Zealand Bankers Association.
Home loan deferral requests peaked at 28,455 in the week of April 10 during New Zealand's first lockdown and have fallen to fewer than 500 a week since early July.
Banks and brokers insist that many of those on a deferral are now resuming normal payments, but there are some concerns that deferral applications will begin to rise again as the wage subsidy comes to an end.
Last month the Reserve Bank extended the period in which banks can offer deferrals without needing extra capital, to March 31 next year.
At property data company CoreLogic, senior economist Kelvin Davidson says the level of deferrals is a worry.
"All else being equal, the deferrals have to be a concern. Without Covid you would hope this wouldn't have happened."
Davidson said many people took the deferral option early on to give themselves breathing space.
"We are hearing people are coming off relatively easy.
"But I'm sure there are people out there that aren't finding it so easy."
Davidson said it was bank loan-to-value ratio restrictions, brought in by the Reserve Bank in 2013 to curb a booming housing market, that had allowed many people to be in a position to take a deferral.
"We are only in the situation we are in because of those LVRs."
He said having the LVRs in place for six years meant Kiwis had more equity in their property than in the past, so they could take a loan holiday.
"If we hadn't had that we could be in a stickier situation."
Despite the stress of Covid-19, mortgagee sales so far remain at rock-bottom levels. In the June quarter just 14 took place across the whole of New Zealand.
Davidson said the extension of the deferral scheme until March 31 would definitely introduce a lag into the system and that could mean mortgagee sales rise after then.
"The risks are to the upside because the numbers are so low now. Based on what we have seen, the support measures are enough to kick the can down the road."
After the global financial crisis it took about nine months for mortgagee sales to rise, hitting a peak of 778 in the September 2009 quarter, followed by a sustained higher level of mortgagee sales for about two years.
"We have got more support measures this time which suggests it could be an even longer time lag.
"Because of the LVRs I would hope the worst outcomes are less likely to happen."
Brad Olsen, senior economist at Infometrics, said on a six-month mortgage deferral people still had to pay the money back, and there was interest on top.
"If it's a transitional six-month thing and you will get another job, it's not such a big deal. But some may struggle to get a job and service the debt."
As of July 31, more than 61,000 loan repayments had been put on deferral with a further 88,000 on reduced payments.
Olsen said that meant a lot Kiwis were going to be in a vulnerable position.
"We know there is 74,000 lost jobs. That is a lot of people."
Olsen also pointed to the rise in KiwiSaver hardship claims in July, which were higher than they were in April.
"it shows there is an increasing need; not only was the number up but the amount.
"From a debt point of view I do worry about the level and the longer term ability for people to pay for it."
On top of those numbers are around 10,000 Kiwis who are simply missing their home loan payments every week.
"On one hand it is good they haven't gone up, but they also haven't declined even though economic conditions improved," said Olsen.
"What the number highlights is there is still an underbelly of people in tough financial conditions."
Olsen said mortgage deferrals could mean those people took longer to pay off their mortgage debt, which could then affect how much they could save for retirement.
"People are already buying houses later in life - it does push the timeframe of when you pay it off later into life."
New Zealand has just had 10 years of growth. Incomes were increasing and yet the country still had high private debt levels, largely because of rising housing debt.
Now that high growth is going to be reversed for a while and incomes have fallen for many.
"We don't have the same growth potential so that affects people's ability to service debt."
One the one hand, servicing debt has been made easier by the Reserve Bank slashing the official cash rate and banks dropping mortgage rates to record low levels. But at the same time, those low rates are also encouraging many people to borrow with a surge of first home buyers trying to get into the market and a rise in property investors buying again.
Olsen said low interest rates tended to encourage investment in houses, which was not nearly as productive as money going into businesses.
"I do worry. We are almost putting more dynamite under the housing market."
And those who borrow heavily now may be caught out by rising rates in the future.
While rates are expected to be lower for longer, Olsen said at some point they would increase.
"My sense is the next three to four years ,we are locked in at very low rates. But in five, seven or 10 years, what happens when we do start to see interest rates pop up?
"The question is what position households are in at that point. Can they cope with higher interest rates?"
Ayesha Scott, a finance professor at AUT, said it was up to individuals to make a borrowing decision that met their requirements today and into the future should rates rise.
"Economics tell us rates will go up. Surely in the next 30 years."
Scott says the problem with mortgage debt is that it is for the long term, and history shows people are not great at long term planning.
"It is going to be really important people are making choices on borrowing today, that they are envisaging their own life and what they want their life to look like in 30 years.
"You could get yourself into quite a bit of trouble if things are going great right now and you borrow, borrow, borrow, only to have delayed pain later if rates were to increase when times become good again."
Satish Ranchhod, Westpac senior economist, said interest rates would not begin rising until the economy was stronger or there was a pick-up in inflation, and that was likely to follow on from a stronger economy.
He said a stronger economy should also mean household incomes were in better shape.
"For a lot of households the current downturn will be an important reminder to keep an eye on debt levels."
Consumer debt - which includes personal loans such as car, refinancing and credit card debt - has plummeted in the last year, falling 10.2 per cent to $14.85b.
Ranchhod said with consumer debt there were a number of reasons why household spending was lower.
"During the first lockdown people couldn't spend," he notes. That is borne out in credit card data, which shows that during April credit spending nearly halved with total billings down 48.7 per cent to $1.897b.
Many of the things people borrowed for, such as overseas holidays, have also disappeared off the radar.
In July Keith McLaughlin, managing director at credit bureau Centrix Group, told the Herald demand for credit slowed in the two weeks ahead of the March 26 lockdown and then dropped like a stone during April.
"It fell down to really low levels."
McLaughlin said that was due to far fewer mortgages being settled as home purchases were left in limbo, while finance applications for luxury items like vehicles plummeted.
Vehicle finance applications fell by 94 per cent, he said.
Applications for traditional forms of credit like personal loans have bounced back, but still remain below pre-Covid levels.
Many people who have consumer debt are now struggling to pay for it because of losing their job, or having their income cut back.
Debt distress on consumer loans is clear from weekly data .
In the week of March 27, when New Zealand went into a level 4 lockdown, there were 99,854 missed payments $418 million of consumer loans.
The number of missed payments on such loans has been dropping since the end of May but in the most recent data - released in the week of August 21 - 70,376 still missed payments on $402m.
Rise of buy now, pay later
One form of debt which has seen demand bounce back a lot more quickly is buy now, pay later - where consumers pay off debt in instalments over six or eight weeks.
Louis Tsang, head of analytics at credit bureau Illion, said buy now, pay later (BNPL) credit applications had increased after New Zealand's first lockdown.
"There was that dip in March, we saw that across all types of credit products, but it [BNPL] recovered much quicker."
By May buy now, pay later applications were 10 to 15 per cent higher than they were before Covid.
"They have very much led the recovery in terms of credit demand.
"We have seen traditional products like credit cards and personal loans have had a slow recovery."
Tsang said people were switching to BNPL because it was easy to sign up online and more people had been forced to shop online through the lockdown periods.
"It coincides with a surge in online shopping. It's offering a different way for people to pay. For some it gives them a greater sense of control."
Some people don't see buy now, pay later it as debt as they don't pay interest on it. But Tsang says it is just a different type of debt.
Buyers who don't pay on time are charged fees, which can be hefty on a low cost purchase such as an item of clothing.
Buy now, pay later lenders aren't regulated under credit laws and debt taken on does not appear in Reserve Bank data.
A spokesman for the central bank said it recognised that buy now, pay later providers were an emerging sector and of increasing importance.
"The recent falls in credit card lending from banks and other providers coincides with the increasing presence of BNPL and an expanding range of payment options.
"Most of our year this year we have been focused on the monitoring the impacts of Covid-19, but the buy now, pay later sector is an area we intend to return our attentions to in the future."
Tsang said there was potential for this product to cause certain types of people financial stress. "It allows some consumers to overstretch themselves."
And the online accessibility makes it easy to use. "You can just buy with one or two clicks."
Tsang said unlike other financial institutions, buy now, pay later companies were not mandated to carry out credit checks, nor to ensure someone could afford the debt.
"You could have a credit card owing thousands of dollars somewhere else and here comes buy now, pay later and you can buy a $1000 TV."
Buy now, pay later companies report that default rates are low, but some earn a large chunk of their revenue through the late fees.
Ayesha Scott said buy now, pay later worked well for people who had the money today to pay and then were able to re-purpose it so it was more of a cashflow management system.
"Where people get into difficultly is if they are buying now and just doing that without thinking about it, with no real intention of how they will pay later.
"We were worried a little bit about this pre-Covid-19 with the rise of BNPL, particularly because it is still unclear how these platforms help consumers manage their debt load and how well they speak to each other."
Scott said it was important consumers remembered that the onus was always on them to pay the money back.
"These platforms exist so you use them. They are not encouraging you to make sound financial choices."
Scott urged those using them to keep track of their debt.
"Particularly now with the uncertainty. With any financial uncertainty it is human nature to think that is a little bit hard to think about and I'm going to think about that later.
"I would really encourage people to think about it now and take back a bit of control. If you are not someone who budgets normally, now is the time to look at the incomings and the outgoings and be more mindful of where money is going, particularly if you are looking at a reduced income."
NATION OF DEBT:
• Friday: How Covid is changing the way we borrow
• Saturday: Kiwis hoard cash as they hunker down
• Liam's Herald on Sunday column